The Ten Pillars of Economic Wisdom

A few times I've referred to "The Ten Pillars of Economic Wisdom" that I teach at the start of every economics course I give. I've usually linked to someone's restatement of them from my book, The Joy of Freedom: An Economist's Odyssey. But I've updated a few times since then. Here's the current version of them.

The Ten Pillars of Economic Wisdom
By David R. Henderson
1. TANSTAAFL: There ain't no such thing as a free lunch.
2. Incentives matter; incentives affect behavior.
3. Economic thinking is thinking on the margin.
4. The only way to create wealth is to move resources from a lower-valued to a higher-valued use. Corollary: Both sides gain from exchange.
5. Information is valuable and costly, and most information that's valuable is inherently decentralized.
6. Every action has unintended consequences; you can never do only one thing.
7. The value of a good or a service is subjective.
8. Creating jobs is not the same as creating wealth.
9. The only way to increase a nation's real income is to increase its real output.
10. Competition is a hardy weed, not a delicate flower.

Comments and Sharing

Number 4 doesn't seem right to me. When someone thinks of a better design for some machine, in what sense was this invention a case of "moving resources from a lower-valued to a higher-valued use"?

You could say that such movement occurs when the old machine is torn apart and rebuilt to the new design, but that seems to miss the point that the real advance was the invention itself. Or you could say that the inventor moved mental resources from thinking about what to make for dinner to thinking about how to re-design the machine, but that seems a rather strained interpretation too.

Number 4 is not right. It reflects common misconceptions among economists who never study wealth, securities, or value.

Capturing value creates wealth. If you create property rights to something that was previously in the commons or had no property rights you have created wealth. Subsequent to this creation of property rights, actions and plans might or might not further increase value and wealth.

Most economists look at the stream of activity and see efficiency, inefficiency, markets, etc. They fail to see that the principal activities in capitalism are i) value creation activities and structures and ii) value capture activities and structures. A key law of economics ought to be that you don't get one without the other.

Actually number 4 seems the deepest point here. It's one of those principles that you can apply to check your work, or cut through the clutter.
Sometimes it allows surprisingly simple arguemtns. Some here might remember when you could only buy gas in some places on alternate days depending on your car's plate. You can show this will just casue problems with some simple queueing theory, and can show with incentives it will misallocate, but you can see it's a bad idea almost immediately with #4 if you look at it the right way. (I can think of two ways: consider uses of motorist's time; and in which receptavle the gasoline is most valuable.)

I'd have thought you (being libertarian)would have more on the role of coercion vs. personal choice and agreement in creating economic value.

As I've gotten older, I've come to think that this non-welfare economics type of argument is more important -- i.e. the corrosive effect of government decision making and control on the engine of economic activity beyond just the immediate inefficiencies we talk about in class.

I think you would be an ideal person to enhance and articulate this adjunct to economic thinking.

General statement: Wow! And I thought these were relatively uncontroversial.
Specifics:
@Radford Neal,When someone thinks of a better design for some machine, in what sense was this invention a case of "moving resources from a lower-valued to a higher-valued use"?
Imagine the invention was never used. Was value really created? I don’t think so.
@Karl Smith,I understand what you are getting at with (6) but the statement itself is overly strong.
Every action does not need to have unintended consequences for the simple reason that you may intend to create imprecise disruption.
It’s true that you could intend to create imprecise disruptions but some of the things caused would be things you didn’t intend.
@AJ,If you create property rights to something that was previously in the commons or had no property rights you have created wealth.
True, but that’s because of how it gets used. There is now stewardship over the resource.
@AJ,I'd have thought you (being libertarian) would have more on the role of coercion vs. personal choice and agreement in creating economic value.
But this is for my class in economics, not a class in libertarianism or political philosophy. We had a side discussion in class the other day about CAFE laws and I said that if they’re worried about global warming, a better solution is a tax on carbon-based fuels. One student asked me, “But you said the first day of class that you’re a libertarian. How can you advocate a tax?” I answered, “I’m paid to teach you economics, not to teach you libertarianism.” BTW, I should have added that I don’t advocate such a tax. I was simply saying that a tax is better than CAFE.

There is an embedded conflict in that a strict interpretation of #1 and #2 (i.e., where the neoclassical school goes) - that there is always no free lunch, that any and all incentives always exhaust their potential effect on behavior - is what gives rise to neoclassicals being cavalier about #5 and #6.

After all, if one has exactly what #1 and #2 entail - complete markets and stable equilibrium and rationally maximizing consumers - then one does, in fact, have every reason to ignore #5 and #6. Decentralized information is already reflected in prices. Unintended consequences are for someone else to rationally react to, you can still tune aggregate variables (hence the entire artifice of representative-agent macro - rational behavior suppresses any unexpected interaction).

@AJ,If you create property rights to something that was previously in the commons or had no property rights you have created wealth.True, but that’s because of how it gets used. There is now stewardship over the resource.

There is a huge distinction between wealth and value. [By wealth, I mean private controlled wealth] This distinction and interaction is not well developed in economics.

I entirely disagree with your point. I would go as far as saying that the invention itself is worthless (except for the pleasure of inventing) and that the only value that is created is in the actual use of the invention.

AJ: There is a huge distinction between wealth and value. [By wealth, I mean private controlled wealth] This distinction and interaction is not well developed in economics.

I'm curious as to how you are defining wealth, and value.
I suspect that, depending on your definitions, there is either actually no meaningful distinction, or you've just relabelled something that modern-day economics has well developed under a different heading (eg positive and negative externalities).

I have no problem with anything on this list, but I wonder if focusing solely or mainly on these "pillars" sometimes confuses economists as to what is possible, what people value, what other values can be traded in exchange for some amount of wealth, etc.

For example, wealth might often be created by making a common resource private, if for example it is better tended, but what if the group sharing the common resource actually subjectively valued the simple fact that they held it in common?

Think of a common meeting area, which residents of a small town share and own collectively, and each month meet to vote on how to use the common area - for sports and leisure, meetings, after-school programs, etc. They might also have rotating responsibilities for cleaning it, etc. - It is possible that more "wealth" can be created by privatizing it, but what if this is a great loss for the people in the town, simply because they cannot enjoy the social aspect, the feeling of inclusion, the practice of democratic discussion and cooperation, etc.? Even if a better division of labor could be had if a private owner hired a cleaning person and the market decided the uses of the space (although then the poor may lose their vote), something of great value might still be lost. Do economists generally take this into account?

How untrue is #7. The most important price of all, that of credit, is not subjective at all these days. It's completely engineered by our activist/statist/corporatist central bank. They need to set prices free!

Tracy W,
I saw your question for AJ and here's my take: Arnold speaks of PSST and I use something similar: circles of sustainability, or the contexts within which we recognize, capture, define and validate wealth, which in turn allows us to measure it. For instance, we primarily use individual constructs (corporate included) in the present which are able to largely define valuation internally. Other constructs of course have derived wealth from community but did so largely by external or 'single point' valuations. One challenge for the present is to be able to create wealth at community levels which acknowledges internal wealth valuations at the level of the individual, instead of arbitrary external valuations. Such a wealth capture point could utilize human skills and knowledge, which are not possible to integrate through corporate production efficiencies (in monetary terms).

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